WASHINGTON – No matter the outcome of the divisive 2016 election, the many regulations still in the pipeline from financial regulators are not going to come to a screeching halt when the next president takes the helm in January, but the agency most vulnerable to big changes is the National Credit Union Administration (NCUA).
When administrations change hands, the incoming staff of the Office of Management and Budget and its Office of Information and Regulatory Affairs traditionally scrap all the previous administration’s unfinished rules and start over – a powerful incentive for the outgoing administration to push to get as many rules finalized as possible.
But financial regulators are insulated from that pressure as independent agencies whose rules are not subject to OMB review. Though credit union and bank executives would likely be anxious for a Republican president to begin immediately halting banking regs once taking office, the insulation is mostly to their benefit.
“When you’re talking about the banking system, you really do the economy and the nation a disservice if policies are seen as oscillating back and forth for political purposes,” said Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association. “I think there was a general belief in Congress when they passed the laws that … because the central element of banking is confidence, you don’t want to make your regulation to appear to be anything other than based upon sound judgment.”
Even so, administrative transitions can be bumpy times for financial regulators, particularly if there are any vacant seats or terms set to expire soon, as is the case at NCUA.
Former NCUA Chairman Debbie Matz’ seat has been open since she stepped down in April. Meanwhile, current Chairman Rick Metsger’s seat is set to expire Aug. 2, 2017, and Board Member J. Mark McWatters has been nominated to serve on the Export-Import Bank board.
In theory, that means whoever the next president is will have the opportunity to appoint at least one new board member — and change who serves as chairman — on his or her very first day in office, and within months could even be in a position to appoint two more new board members. In other words, it is conceivable the next president will be able to “clean house” at NCUA, appointing an entirely new board in less than a year.
Though that scenario is conceivable, it doesn’t make it likely. It is rare that nominations made by one president are honored by a new president taking office, even when they are from the same political party. As a result, it’s unlikely McWatters’ nomination to Ex-Im will move forward, so his seat on the board should be stable until at least Aug. 2, 2019, when his term expires.
But that still leaves one open seat on the board that could be filled immediately, if that is the next president’s pleasure, and Metsger’s term will still expire this summer, giving the president the opportunity change two of the three seats on the NCUA Board within her or his first eight months in office.
Transition Tactics
Before much of that takes place, however, Obama must finish out his term and the president-elect will have to work through the transition process – which should hopefully be less fraught than the last one, which came amid the near-collapse of the international financial system.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, noted that the transition from the Reagan Administration to the George H.W. Bush administration occurred in the midst of a recession and at the height of the savings and loan crisis.
“We don’t really have a good model here,” Petrou said. “The [George W. Bush] to Obama transition in the fourth quarter of 2008 was in the midst of a hellish financial situation. There wasn’t the continuity of construct because everything had blown up – there was nothing to continue.”
Oliver Ireland, partner with Morrison & Foerster and a former Fed official, said if Hillary Clinton wins the White House, the most recent analogous transition would be the transition from Reagan to Bush. At that time, the new Bush staffers came into the regulatory agencies and laid out an aggressive agenda to addressing the crisis – moves that ultimately resulted in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. But those reforms were already in the works before Bush took over, Ireland said, and if Clinton prevails, it is not abundantly clear where she wants the agencies to go.
She’s called for targeting the shadow banking system and giving regulators more power to deal with systemically important financial institutions.
“If Clinton came in, would Clinton come up with a proposal to break up the big banks? I don’t know,” Ireland said. “There are regulatory requirements already ratcheted up on the big banks. Does that just get incrementally a little bit tighter, or does she have something specific in mind?”
Both Clinton and her Republican rival Donald Trump have laid out some priorities for financial regulation if they are elected. Clinton has said she
Ernie Patrikis, partner at White & Case and former official with the New York Fed, said the main lever that an incoming administration has over independent regulators is in selection of personnel. Typically that selection will roll out over time as the previous administration’s appointees’ terms expire, though he said there is some precedent for the heads of some agencies to formally or informally offer their resignations upon the new president’s arrival.
“Even some of those who are not required to do so do it, and that’s really the key to all of this,” Patrikis said. “If the president keeps people in the independent agencies in place, then they may well continue with what they’ve started.”
Court’s CFPB Ruling
Another important question affecting this year’s administrative transition is how independent regulators remain in the wake of a federal appeals court’s ruling last month that declared the Consumer Financial Protection Bureau an arm of the White House – a decision that
“Not only would regulations would have to go through there, but the budget would,” Abernathy said. “I could imagine … if you had an OMB that asserted its authority [it could tell the bureau], ‘You may get your budget from the Fed, but you have to run it by us first.’”
But the banking regulatory structure does not turn on a dime, Patrikis said. So whichever candidate wins on Nov. 8, their expectations should be tempered.
“All of these agencies … have a huge bureaucracy,” Patrikis said. “That thing does not move much. While we have this group at the top, it takes them a while to get their arms around it. They can’t just change things overnight, no matter what they say.”
Lisa Freeman contributed to this report.
